FAS Intro: Following is the second Annual Report of the Director of Central
Intelligence. Preparation of the these unclassified reports in required
each year under the 1994 Intelligence Authorization Act, and section 109
of the amended National Security Act. This report was released in March
1996 pursuant to a request by the Federation of American Scientists.

ANNUAL REPORT

FY 1994

DIRECTOR OF CENTRAL INTELLIGENCE

September 1995

THE INTELLIGENCE COMMUNITY - 1994

The US Intelligence Community (IC) provides timely and accurate information
to policymakers and military commanders on a host of issues. This information
helps policymakers prevent or respond to war and conflict; control or modify
international events; and negotiate treaties on economic, political, environmental,
and military issues. Intelligence also supports military commanders in
peacekeeping and humanitarian relief efforts, and in armed conflicts.

President Clinton recently observed, "Most Americans never know
the victories our IC achieves or the crises it helps us avoid..."
This Annual Report discloses some of these successes. The report protects
the sources providing the vital information and the unique methods critical
to acquiring data surreptitiously, but it provides insights into the contribution
US intelligence makes to support national objectives and priorities. The
report also addresses the challenges facing the IC and its strategies for
responding to those challenges.

SUPPORTING POLICY FORMULATION AND EXECUTION

The IC uses an array of collection and analytic capabilities to support
policymakers as they confront new issues and form appropriate responses.
Decisionmakers receive the latest and best information available in a variety
of formats: from phone calls and videoconferences to formal published reports
or detailed substantive briefings from interagency task forces.

Support to Military Operations and Crisis Support. Much of the
IC's effort is designed to support US military needs during hostilities
and other crises. When policy decisions mandate or involve the use of US
military forces for combat or humanitarian and disaster relief, it is intelligence
that helps protect our troops and enhances their performance. Moreover,
as crises emerge, intelligence often provides the only reliable and accurate
information about ongoing events and leadership intentions. Human sources
on the scene, overhead reconnaissance, and technical eavesdropping provide
a critical difference in the speed and accuracy with which our government
can act.

During several crises in recent years, military leaders have had ready
access to responsive, tactical intelligence from several joint IC endeavors.
The Pentagon's National Military Joint Intelligence Center, augmented by
analytic and administrative support from the National Military Intelligence
Production Center and the Central Intelligence Agency's (CIA) Operations
Center provided daily, around-the-clock support. In addition, interagency
task forces were quickly set up to focus analytic and collection capabilities
on hot spots and burning issues. Finally, National Intelligence Support
Teams, comprising intelligence officers from a variety of agencies, were
dispatched with the deployed forces to provide expertise and direct two-way
access between the IC and military commanders. For example:

During the 1994 Cuban migration crisis, an interagency Cuban Task Force
provided intelligence on the flow of refugees and insight into the Cuban
leadership's intentions.

When military units deployed to Rwanda for Operation SUPPORT HOPE,
the IC provided updates on population movements between camps and potential
threats to US troops and refugee camps from nearby volcanoes. Our forces
were able to establish camps in safe areas and move refugees from high-risk
areas.

During the crises in Somalia and Haiti, assessments were provided to
policymakers and military commanders on threats to US forces, the indigenous
logistical infrastructure, difficulties in distributing food and medical
supplies, and prospects for restoring democracy. Military linguists with
Haitian Creole skills also provided direct operational and intelligence
support.

To help policymakers prepare for potential trouble, the IC cataloged
and ranked the world's most dangerous nuclear reactors. The information
assisted policymakers in prioritizing safety assistance programs and planning
for potential disaster relief.

Intelligence support allowed US policymakers to issue demarches to
Beijing on China's sale of its M-11 short-range ballistic missile to Pakistan,
in violation of the Missile Technology Control Regime.

Activities related to International Atomic Energy Agency Safeguards
and the 1991 North-South NonNuclear Agreement enabled policymakers to engage
North Korea over the production of weapons-grade fissile materials.

The March 1994 arrest and June conviction of chemical weapons proliferator
Manfred Felber deterred illegal shipments of restricted military equipment
from reaching Iran.

COUNTERING THREATS TO US INTERESTS AND CITIZENS

In addition to traditional military and political collection and analysis,
the IC is vigorously engaged in nontraditional targets and issues, such
as economic security, counterterrorism, and counter-proliferation.

Economic Security. The IC provides policymakers with information
and assessments on questionable foreign competitive business practices
and financial dealings; monitors compliance with sanctions and international
economic agreements; and explores new prospects for regional economic opportunities.
The Community also examines illegal activities supported or condoned by
foreign governments that unfairly disadvantage commercial and private interests
of national concern. Surveillance activities this past year enabled US
authorities to arrest and indict two Chinese, living in the United States,
for stealing nearly a million dollars worth of proprietary computer source
codes. Washington and Beijing subsequently negotiated new trade agreements
that protect patented intellectual property rights and stop the sale of
illegally copied software that already has deprived US industry of a billion
dollars.

Counterterrorism. The IC plays a strong role in protecting US
citizens and interests from terrorist attacks by providing threat assessments,
advisories, and alerts and helping to bring terrorists to justice. It also
supports the US Government engage in cooperative ventures with other governments
in international efforts to combat terrorism. During 1994, these activities
supported the successful prosecution of four men involved in the February
1993 bombing of the World Trade Center in New York City. Each defendant
was sentenced to 240 years in prison and was fined $500,000.

Counterproliferation. The IC emphasizes the need to contain the
spread of nuclear, biological (BW), and chemical weapons (CW) of mass destruction
and other advanced weaponry:

Last year, the Community aided the successful interdiction of missile
solid propellants and chemical agent precursors destined for Iraq and addressed
questions about Iraqi Scud missile inventories.

It confirmed the Chinese development of two new surface-to- air missile
systems that significantly improved Chinese naval air warfare capabilities.

IDENTIFYING OPPORTUNITIES FOR US ADVANTAGE

Technology increasingly defines national strength. Last year intelligence
informed US policymakers about foreign government programs that subsidize
commercial research and development in a variety of technologies. This
information helped our policymakers to develop responses to practices that
provided foreign firms with an unfair competitive advantage over US industries.

The IC also sought opportunities to transfer technologies to public
use. The 3 January 1995 issue of New Technology Week reported that the
National Security Agency (NSA) offered fact sheets on 17 of its technologies
at a fall trade show for potential transfer to US industry. Highlights
included a portable fingerprint scanner, a dual speech-and-image recognition
personal identification system, a portfolio of programming languages, a
multimedia language training package, and a series of electronic devices
for processing and storing computer data.

The Community also shared technology involving advanced imagery processing
techniques with the medical community. These techniques will be used for
the early detection of breast cancer. A leading medical authority assessed
that this development had the potential for reducing breast cancer fatalities
by a third.

SUPPORTING OTHER US GOVERNMENT PROGRAMS

The unique capabilities and skills of the IC frequently benefit other
US Government agencies and activities. For example:

Language tools for nonlinguists, developed by the DCI's Foreign Language
Committee, have been used by the Coast Guard and the Immigration and Naturalization
Service field personnel to communicate with non-English speakers. In one
instance, these tools supported the Coast Guard's interdiction of a Chinese
alien-smuggling operation by enabling communication in Fujianese, a Chinese
dialect. The Commandant of the Coast Guard, in a personal letter to the
DCI, described the tools as having "immeasurable value," and
stated that they had been put to immediate use.

The Community's extensive familiarity with today's increasingly complicated
signals environment was instrumental in helping to train Signals Intelligence
operators from the military services and improving operator efficiency
and expertise.

The IC also has expanded information sharing with our allies. NATO for
the first time received reporting on the proliferation of weapons of mass
destruction. Tactical intelligence also helped protect and guide the movements
of US, UN, and NATO forces operating in northern Iraq and the former Yugoslavia.
This included direct intelligence support for the first combat operations
ever undertaken by NATO. In addition, for over 15 years, US intelligence
has contributed to the Middle East peace process by reporting to all parties
of the Multinational Forces and Observation mission in the Sinai.

ADJUSTING TO THE NEW WORLD ORDER

The IC is undergoing a period of rapid transition. It is improving and
modifying sources and methods for obtaining information as the needs of
its customers continue to change in type, scope, precision, and timeliness.
Like the rest of government, however, the IC must fulfill today's needs
and prepare for tomorrow's demands amid resource constraints.

Such a dynamic climate offers challenges and opportunities, and the
Community has undertaken several initiatives to improve its operating effectiveness
and efficiency. It has begun implementing a National Intelligences Needs
Process to enhance customer focus. Coupled with Community support for the
new Presidential Decision Directive/NSC-35 on intelligence priorities-
issued in January 1995-- it continued to redirect US intelligence operations
and developmental activities to maintain focus on the geographic areas
and substantive topics of highest importance to its consumers.

The IC has emphasized developing programs jointly with the Department
of Defense (DoD). Community focal points have been designated to coordinate
open source, foreign language, and research and development activities.
INTELINK, a classified version of INTERNET, is being used to globally integrate
information systems across the Community and its customers. Similarly,
an open source information system-- an "Official Use Only" private
network operating on INTERNET-- is being used to access directly unclassified
sources maintained on INTERNET and other commercial systems and to disseminate
that information worldwide. Finally the Community is working to implement
changes recommended by a Joint Security Commission to improve security
while fostering more openness with the American people.

These initiatives clearly are enhancing the quality of our performance
and reducing costs. They emphasize expanding Community interactions, focusing
on the customer, and streamlining operations.

Redirecting Community Attention. Collection and production capabilities
previously focused on strategic military targets in the former Soviet Union
now are directed primarily toward political and economic topics, weapons
proliferation, force modernization, and support to military forces. Transnational
organizations are increasingly important. The IC is focusing on tracking
foreign terrorist groups and patrons, narcotics producers and traffickers,
organized crime groups, arms dealers, and individuals, companies, and governments
involved in unethical foreign commercial practices. To better address these
topics, the Community is refocusing attention on:

Expanding coverage of countries that are hostile to the United States,
or that have strategic weapons arsenals, economic or political power, or
long-term orientation will decisively affect American national security.

Enhancing the foreign language skills and the cultural and area knowledge
of our collectors and analysts.

Using open source materials to focus human and technical clandestine
operations more efficiently.

Increasing our production of actionable intelligence that supports
law enforcement agencies.

Focusing on the Customer. In 1994, the Community began implementing
the National Intelligence Needs Process to ensure a lively dialog with
its customers. The Needs Process is intended to align resources with our
customers' highest priorities and will help guide intelligence program
planning and funding decisions. It also is used by the DoD to help assess
military intelligence activities and is facilitating closer coordination
across all US intelligence programs.

Last year, 18 issue areas were identified as the primary intelligence
needs of policymakers and warfighters. For each area, the Director of Central
Intelligence (DCI) assigned an Issue Coordinator with responsibility to
identify and prioritize customer needs and guide the way intelligence programs
respond to these needs.

The IC is continuing to refine the Needs Process in an effort to link
resource allocation decisions explicitly with customer needs. This process
will help identify activities that are critical and those that-- while
important-- should be canceled, delayed, or reduced to free resources for
higher priority ventures. We expect our customers to benefit from having
their needs drive the way we allocate resources and set the priorities
that focus our efforts.

Streamlining Operations. The Community actively participates
in administration efforts to "reinvent government" and improve
its efficiency and value. The Vice President concurred with over 30 actions,
including enhancing responsiveness to customers, linking Community computer
systems, and improving capabilities to support ground troops during combat.
Nearly half of the actions have been completed and the rest are on or ahead
of schedule.

The IC is streamlining organizational chains of command and reducing
the number of personnel. In the largest reorganization in its history,
the NSA reduced staff organizations by 50 percent and the number of second-
and third-line organizations by nearly the same amount. The Defense Intelligence
Agency (DIA) reduced supervisory positions by nearly a third and consolidated
its human source collection activities with those of the military services
into a single organization, the Defense HUMINT Service. By the end of this
decade, the Community will be operating with 21 percent fewer civilians
and almost 25 percent fewer military personnel than in 1990. These reductions--
which far exceed the goal of a 12-percent reduction by 1997 set by Presidential
Executive Orders and the September 1993 National Performance Review-- increase
the funding available for investments in future capabilities.

ADVANCING RESEARCH AND DEVELOPMENT

The Community is building on available commercial technologies and openly
soliciting ideas in key areas. It is seeking advice from leading-edge scientists
and technology innovators, and making "seed" investments in areas
that offer potential for high payoff but have smaller chances of success.

The DCI's Advanced R&D Committee worked with the Imagery R&D
Council and R&D managers from the Departments of Energy and Defense
to produce a Critical Technologies List to guide investment decisions.
Key areas include:

INTERNET, a worldwide computer network of shared public data bases,
is being tested as a means of providing efficient and timely access to
open source information.

A public announcement soliciting new ideas for small power sources
and power storage devices led to funding of several selected research projects.

IMPROVING QUALITY PERFORMANCE

The IC established a Quality Council to improve the efficiency and effectiveness
of intelligence. Chaired by the Deputy Director of Central Intelligence,
the Council oversees implementation of the actions endorsed by the Vice
President and promotes quality initiatives throughout the Community. Components
are independently conducting self-assessments based on the criteria in
the President's Award for Quality and are using the results to guide actions.

Several "Reinvention Labs" were created to stimulate innovative
thinking and actions:

One lab examined ways to improve intelligence support to combat forces
at the division level and below. The results are being reviewed by senior
officials in the Community.

Another lab is developing new tools to rapidly search and retrieve
information from massive multilingual bodies of text through an innovative
partnership between intelligence agencies, defense, industry, and academia.
Commercial products and several prototype government applications are already
emerging.

A third lab created a Unified Testing Plan for foreign languages which
significantly improved interagency cooperation and sharing in language
learning, developed language tools for the Coast Guard and the Immigration
and Naturalization Service, and created and marketed an innovative, interactive
video language training program in a joint venture with the private sector.
This lab, sponsored by the Foreign Language Committee, was awarded Vice
President Gore's reinventing government "Hammer Award."

Other examples of Community innovation include NSA's ongoing quality
activities where computer and network installation time was reduced from
over 100 days to just 14 days. These measures reduced general supplies
and equipment purchases by $25 million per year and streamlined the bill-paying
process to avoid late- payment penalties. CIA's Office of Information Technology
was a finalist for the 1994 President's Quality Improvement Prototype award,
the second highest quality award in government. Community- wide benefits
are being derived from a badge-reciprocity system-- between CIA, NSA, DIA,
the Department of State, the Central Imagery Office, and the Joint Chiefs
of Staff-- that has reduced the cost and inefficiency of passing employee
clearances to other agency compounds for visits.

AREAS FOR IMPROVEMENT

The IC also is reviewing its personnel policies and business practices
in light of the Aldrich Ames case and the sexual discrimination case against
CIA's Directorate of Operations. Although Ames was eventually apprehended,
we clearly missed several early warnings. Faced with the reality of this
failure to protect our nation's secrets, we have renewed the emphasis on
counterintelligence awareness and accountability and are working to enhance
the security consciousness of our employees. The sex discrimination case
filed by female case officers has prompted the CIA to renew its efforts
to ensure the fair and equitable treatment of all employees.

The Community also is reviewing its efforts to keep Congress abreast
of plans and activities. The concerns raised by the Senate Select Committee
on Intelligence that it had not been kept fully informed about the status
of the National Reconnaissance Office (NRO) building underscored the importance
of providing complete and accurate information. Community components are
reviewing their policies and procedures for ensuring Congressional notification
and are underscoring those responsibilities to all employees.

CHALLENGES AHEAD

We anticipate that the international environment will remain dynamic
well into the 21st century. Such a world increases the importance of information
for those who make and implement policy. US policy officials and military
commanders must understand the cross-currents, pressures, plans, aspirations,
and capabilities of foreign governments and entities to reduce uncertainty
and maximize the ability of the United States to protect and promote its
national interests. At the same time, we expect continuing constraints
on resources as the government seeks to reduce the budget deficit. The
IC will attempt to reconcile these needs and constraints by improving efficiency
and concentrating resources on priority targets. It also will seek to ensure
responsive global reach, flexible collection resources, expert and versatile
personnel, and crisis or wartime surge capabilities.

As the Community proceeds with these efforts, it will face numerous
challenges. The Community will need to:

Deal with the expanding volume of open source information which in
turn improves the targeting of higher risk and higher cost intelligence
collection systems.

Focus more resources on nontraditional targets.

Expand intelligence support to military operations.

Our intelligence infrastructure will need to be flexible, allowing us
to redirect the substantive and geographic focus of collection and analytic
resources. We no longer are able to maintain a constant global presence
or provide unbroken coverage of our formerly extensive mix of issues. Establishing
a flexible infrastructure will require prudent investment in collection
and processing systems. These systems must be evaluated by their contribution
to our overall intelligence capabilities and their ability to provide flexible
global reach against all likely targets.

The commitment and professionalism of our people have always been among
our strongest assets, and intelligence professionals possessing both substantive
expertise and operational skills are key to the Community's successful
support of policymakers and military commanders. Furthermore, changing
customer needs are requiring a wider variety of substantive and language
experts. Our ability to respond, however, is being hampered by personnel
downsizing that affects the mix of skills brought to bear on changing targets
and issues. We are stepping up efforts to cross- train and retrain our
employees and draw on other expertise. One defense component, for example,
is implementing an innovative program that uses military reserve personnel
to provide needed language skills. Advances in technology and process improvements
are enhancing each individual's productivity and versatility.

In looking ahead, it is clear that intelligence will remain integral
to the US Government's ability to provide international leadership and
protect US interests during peace, crisis, or war. The United States will
benefit from the IC's worldwide capabilities to reduce uncertainty, provide
warning, aid in crisis management, and bolster war-fighting capabilities.
In the future, intelligence capabilities will continue providing the qualitative
advantage required for effective international leadership. Intelligence
will help policymakers anticipate and understand developing threats, manage
events, and identify advantages. It will support a wide range of policy
endeavors, from trade negotiations and diplomatic initiatives to humanitarian
aid relief and the enforcement of UN sanctions against rogue states. Intelligence
also will track foreign weapons programs and monitor force structure changes
and operational planning. Our intelligence professionals and technical
systems will provide rapid and effective surge capacity during crisis and
war. Intelligence will remain key to the continuing ability of the United
States to protect its citizens and their way of life.